Transformation Heroes in Greater China
In the rapidly changing markets of Greater China, disruption is always around the corner. Companies in every industry need to be prepared to continually reinvent themselves to remain competitive. Transforming a company can require a variety of strategic moves: introducing an entirely new product line, changing the business model or closing down entire business lines, overhauling the brand image, improving operations, reshaping the corporate culture—or all of these elements.
The decision to transform is not a guarantee of success, however. BCG research has found that globally, 75% of corporate transformation programs fail to improve the companies’ short- or long-term ability to create value.
BCG recently examined the record of value creation among large companies in Greater China. We looked across industries, at both public and privately-held businesses, examining those that experienced a significant decline in revenue, profit margin, and/or market capitalization in the past decade yet then developed a transformation strategy that put them on the path to a clear rebound.
We look at five of these transformation heroes—tech giant Alibaba, state-owned insurer CPIC, auto manufacturer Geely, tech company Acer, and privately-owned apparel company Semir—and how they each set about reinventing their existing business in ways that continue to increase their value. Taking into consideration their stories and our research and experience working with hundreds of additional companies, we’ve identified five critical elements of a successful turnaround.
1. Attack the Status Quo, Aggressively and Constantly. When China’s overall GDP was growing by double digits, most companies were able to achieve strong growth and robust profitability with or without the best business model. As the market has matured and become more complex, however, constant self-examination has become key to success. Companies find that they have to be highly proactive, anticipating challenges ahead. Many players have initiated transformation strategies even without facing a crisis because they recognize that market trends are changing, and they must adapt. Our research found that companies that transformed preemptively created value, reflected in total shareholder return (TSR) that, on average, was 6% higher over a three-year period than the TSR of companies that transformed reactively. Amidst rapid shifts in the market, speed and efficiency make a big difference. Those that succeed at transformation view it as a continuous journey; being prepared to meet constant change head-on becomes a way of life.
2. Be Strategically Focused on Ways to Win in a Changing Market. China’s economy has shifted in the past ten years from “growth in quantity” to “growth in quality.” As a result, companies that push products and services onto the market without establishing clear differentiators will be left behind. According to BCG's research, the companies that have gone through trans- formations with a long-term strategy outperformed those with poorly-defined strategic plans. Many turnaround players have redefined their value proposition from “affordable” to “brand equity focused” to attract a more upscale domestic consumer and expand globally. To compete today, players must identify where they can win, mapping all market segments and determining which parts of the business have the core competencies that will provide a competitive advantage. Moreover, business leaders must be prepared to explain all steps of the strategy to employees and investors. Often, they must terminate or divest unprofitable business even if it causes a short-term hit, then take action to acquire and/ or invest in new businesses. All stakeholders need to be aligned on strategy to win in the medium- and long-term.
3. Drive Both Growth and Operational Excellence. A successful transformation strategy requires a deep examination of the value proposition that existing backend functions such as IT, HR, and operations teams provide. Operational excellence, especially when enhanced by strong digital capabilities, plays a key role in delivering quick results. That is because a company that has developed operational excellence will be in a position to assure that it can fund the transformation journey from the early stages to its conclusion and will be able to build a foundation for sustainable growth.
Strategic changes to capture growth generally require alterations to the operating model to achieve enhanced performance that is sustainable over many years. Investment in R&D and innovation is essential to winning in the long run. Our analysis found that during transformations, companies with above-average R&D spending deliver about 5 percentage points more in TSR than those with below-average R&D spending.
In the last two global downturns, the most successful companies were diligent about pursuing operational efficiencies, thereby improving their profit margins. But revenue growth was the largest driver of their performance, accounting for nearly 50% of TSR, or twice the impact from cost reductions.
4. Shape the Organization and Culture. The way a corporation is organized has a powerful effect on its products, services, customer relations, brand, and every other rung of the value chain. If management transforms the value proposition, the entire organizational structure and talent pool needs to be in sync with the new strategy—an outdated corporate culture cannot compete in a changing market. It is often necessary to restructure, sometimes with new teams. However, a comprehensive strategy for top-down communication, along with relevant training, can instill a new culture and mindset in the organization.
5. Manage a Program, Not Multiple Projects. “One goal, one program” is integral to facilitating a successful transformation. A company’s leaders need to direct their actions at restructuring the business as a whole instead of simply adjusting to changes. Our research showed that formalized large transformation programs outperformed smaller-scale efforts by an average of 5% in annual TSR in a five-year window.
It is important that the entire organization is vested in the program. An efficient communication plan and incentive program are key to engaging employees in the transformation and showing them how they can help make the outcome successful. There should be a transformation management office (TMO), staffed by full-time employees. The TMO role is to create a customized transformation infrastructure and milestone-tracking mechanism that will facilitate the transformation and ensure that results are deliverable. At the same time, corporate leaders should be prepared to keep the organization apprised of progress through continuous top-down communication, reiterating that this is an ongoing, organization-wide program.
Read the stories to see how strong corporate leaders with determined visions have embraced the five elements identified and become transformation heroes, turning around large companies facing high-stakes changes. These measures have led to dramatic improvements in performance and market share, and created substantial value for shareholders. Their stories can instruct and inspire other companies that are facing disruptive changes or anticipate the need to begin a turnaround journey.
Full article: https://www.bcg.com/zh-cn/publications/2021/five-strategies-for-a-successful-business-turnaround